01 – Structure
Treaty versus facultative: which structure and when
A broker managing a standard commercial property portfolio and a broker placing coverage for a deep-sea oil platform are both doing reinsurance work. The structures they use could not be more different, and the vocabulary they need reflects that difference.
Treaty reinsurance covers an entire portfolio or class of business under a standing agreement. The reinsurer does not evaluate each individual risk. They accept, as a block, everything that meets the cedant’s underwriting guidelines. This is why treaty business is efficient for high-volume, homogeneous portfolios: motor, small commercial property, general liability, professional indemnity. The reinsurer’s due diligence runs at the programme level during annual negotiations, not at the policy level during the year.
Facultative reinsurance moves in the opposite direction. Each risk is evaluated individually. The reinsurer sees the submission, assesses the specific exposure, and decides whether to participate and on what terms. This is the structure for risks that cannot be accommodated within treaty guidelines: a single risk that is too large, too hazard-specific, or too unusual for the treaty to price correctly.
S&P Global Ratings’ 2026 Global Reinsurance Sector View confirms that treaty business dominates the market by volume, operating in an environment of double-digit rate cuts and significant capacity. Facultative placements are growing in mid-market segments for sector-specific risks in renewable energy, specialised manufacturing, and technology, as documented in the Gallagher Re 2026 Global Facultative Market Report.
These structures require different skills. Treaty placement is a relationship and programme negotiation. Facultative placement is an individual underwriting submission, requiring the broker to present risk information in a format that enables fast, accurate underwriting decisions.
02 – Proportional
The true cost: where manual reconciliation destroys value
In proportional reinsurance, premiums and losses travel in the same direction at the same ratio. The cedant and reinsurer share both upside and downside in fixed proportions.
Quota share
A quota share treaty fixes a single percentage that applies to every policy in the covered class. If the quota share is 30%, the reinsurer receives 30% of every premium and pays 30% of every loss. There are no exceptions based on individual risk size.
The economic logic for the cedant is capital relief: ceding 30% of premiums also cedes 30% of the capital requirement for those risks, freeing up capacity to write more business. The cession percentage and the ceding commission rate are both critical negotiation points.
Ceding commission compensates the cedant for the cost of acquiring and administering the original policies. PartnerRe’s published analysis of quota share structures notes that ceding commissions typically range from 25% to 35% of ceded premium, with sliding scale structures that increase the commission when the loss ratio is low and reduce it when losses are high. Profit commission is an additional payment available when the reinsured book performs above the agreed profitability threshold, with a multi-year loss carry-forward mechanism that suppresses commissions if a prior year’s losses are still being recovered.
Surplus reinsurance
Surplus reinsurance is more selective than quota share. Rather than ceding a flat percentage of every policy, the cedant defines a retention limit per risk. Anything above that retention is ceded to the surplus treaty, proportionally. A cedant with a £2,000,000 retention writing a £10,000,000 risk would cede £8,000,000 to the surplus treaty, representing 80% of that risk. On a £3,000,000 risk from the same portfolio, the reinsurer would take £1,000,000, or 33%.
This structure suits portfolios with significant variation in individual risk size, where a flat quota share would either cede too much on smaller risks or leave the cedant overexposed on larger ones.
01 – The Settlement Delay
Every correction round extends the settlement cycle
The premium that should have been received this month arrives next month, or later. Working capital tied up in a preventable delay.
02 – Financial leakage
Errors that pass manual checks distort commission calculations
Systematic misclassification errors continue to affect profit commission and reserve positions until caught at audit or renewal. By then the error has compounded.
03 – Relationship erosion
Cedants factor error frequency into renewal decisions
Persistent error notifications and settlement delays are a signal about operational quality. They influence the cedant’s decision about whether to continue the relationship.
03 – Excess of Loss
Layers, towers, and what goes wrong at attachment points
Excess of loss reinsurance does not share premiums and losses proportionally. It responds only when the cedant’s loss from an event crosses a defined threshold.
The layer structure
An XoL layer is expressed as a limit sitting above an attachment point. A £10,000,000 xs £5,000,000 layer means the reinsurer pays losses between £5,000,001 and £15,000,000 arising from a single event. Losses below £5,000,000 are borne entirely by the cedant. Losses above £15,000,000 exceed this layer and would need to be covered by a higher layer in the tower.
The tower is the full stack of layers placed to protect the cedant. A typical catastrophe XoL tower might have four to six layers, each with a different attachment point, limit, and reinsurer composition. The working layer sits closest to the cedant’s retention and is expected to be triggered more frequently than the layers above it. Higher layers carry lower premiums but wider limits, reflecting the lower probability of being reached.
Per-occurrence versus aggregate
Per-occurrence structures respond to losses from a single defined event: a storm, a fire, a cyber incident. The hours clause defines what constitutes a single occurrence for catastrophe perils. Aggregate XoL responds when the cedant’s cumulative losses over a defined period exceed the attachment point. This structure suits lines with high-frequency, low-severity claims where the annual accumulation poses a capital threat.
Reinstatement provisions
Once a loss exhausts an XoL layer, that capacity is gone unless it is reinstated. Automatic reinstatements restore coverage immediately at a pro-rata premium. Paid reinstatements require the cedant to actively exercise the option and pay the reinstatement premium. For catastrophe-exposed programmes, the number of reinstatements available is a critical structuring decision. A programme with no reinstatements is a one-shot cover for the relevant event type.
04 — Contract Terms
Contract terms that shape how losses are paid
Ultimate Net Loss versus ground-up loss
Most XoL contracts define the cedant’s loss recovery on the basis of Ultimate Net Loss rather than ground-up loss. Ground-up loss is the total gross loss from an event before any deductions. UNL is what remains after recoveries, including salvage, subrogation, and other reinsurance, have been applied, plus loss adjustment expenses.
The UNL definition matters because it determines the base against which the attachment point is measured. A cedant with a £5,000,000 attachment point on a UNL basis and £1,000,000 in subrogation recoveries on a £7,000,000 ground-up loss would present a UNL of £6,000,000, meaning the XoL layer responds to £1,000,000 of loss. The same event on a ground-up basis would present £2,000,000 to the layer. Brokers must confirm how UNL is defined in each contract and which items are deductible.
Occurrence, claims-made, and losses occurring
These terms define when a loss is covered. Occurrence basis and losses occurring basis both cover losses that happen during the policy period, regardless of when the claim is reported. Claims-made basis covers claims first made and reported during the policy period, provided the underlying event occurred after a specified retroactive date. Long-tail lines such as professional indemnity and directors and officers liability are commonly written on a claims-made basis.
The mismatch between the basis of the underlying policy and the basis of the reinsurance treaty is a source of coverage gaps that brokers must check explicitly at placement.
Hours clauses and exclusions
For catastrophe XoL, the hours clause defines the window within which all losses from a single peril must fall to be treated as one occurrence. A 72-hour clause for windstorm means all losses arising from a single storm system within any consecutive 72-hour period are aggregated as one event. Standard exclusions include war and civil commotion, nuclear events, and specified cyber perils unless explicitly covered. Warranties impose conditions that must be met for coverage to apply, and breach can void coverage for affected losses.
05 – The Bordereau
The bordereau: what it is, what it contains, and why errors are costly
The bordereau is the document through which the cedant accounts to the reinsurer for what has been written and what has been claimed under the treaty. A premium bordereau lists the individual policies ceded: policy numbers, insured names, sums insured, inception and expiry dates, premiums, and the cedant’s proportion retained. A loss bordereau lists claims: the policy reference, date of loss, nature of loss, reserve amount, and amounts paid to date.
Errors cause real operational harm. Incorrect premium allocations affect the reinsurer’s accounting. Misclassified claims affect loss ratio calculations, which in turn affect sliding scale and profit commission entitlements. Late submissions delay premium settlements and loss recoveries. For Lloyd’s of London business, the Delegated Data Manager sets out the data fields and submission standards that managing agents require. Submissions that fail validation are rejected before settlement, creating the correction cycles discussed in greater detail in the bordereaux reconciliation article.
Automation context
The data and document automation capabilities in Agiliux address this at the architecture level. When treaty terms are held in the system of record, bordereau fields are populated from that data rather than re-entered manually. Validation runs at ingestion against the treaty parameters, flagging discrepancies before the submission leaves the system.
06 – London Market
London Market placement vocabulary
The London Market operates as a subscription market. The broker prepares a slip, a document summarising all material information about the risk and the proposed terms. The slip is the contract document, and its accuracy directly affects how reinsurers evaluate and price the risk.
The broker approaches a lead reinsurer first. If the lead agrees to participate, they sign the slip and set the terms. Following markets then participate on those lead terms, each signing their percentage line. The broker’s task is to secure sufficient lines to reach 100% coverage.
If the market is oversubscribed, individual lines are signed down proportionally so the total reaches exactly 100%. NTU, not taken up, describes a placement that does not proceed. Line reduction occurs when a reinsurer that initially committed to a line subsequently reduces it, which can leave the broker with a shortfall requiring additional market sourcing.
The lead reinsurer’s role is disproportionately important. A strong, credible lead signals risk quality to the market and typically makes it easier to fill the programme on the same terms rather than renegotiating with each following market individually. Brokers who can place the lead quickly and on favourable terms operate with a structural advantage in the subscription process.
07 – Reference
Reinsurance structure comparison
| Reinsurance type | Best used for | Broker’s primary role | Key advantage |
|---|---|---|---|
| Quota share treaty | High-volume homogeneous portfolios where the cedant seeks capital relief and stable ratios | Negotiating cession percentage, ceding commission rate, and profit commission structure | Broad portfolio coverage with predictable premium and loss sharing |
| Surplus treaty | Portfolios with variable individual risk size, where a flat quota share would over-cede smaller risks | Setting retention limits, defining number of lines, and allocating premium and loss proportionally | Targeted cession on larger risks without ceding the entire portfolio |
| Facultative certificate | Individual complex, large, or high-hazard risks outside treaty scope | Preparing detailed underwriting submissions and negotiating bespoke terms individually | Tailored coverage and access to specialist capacity for specific risks |
| Per-risk XoL | Protecting against large individual losses within a portfolio | Structuring attachment points and limits, modelling frequency and severity at each layer | Protects balance sheet from severe single-risk losses |
| Catastrophe XoL | Protecting against accumulated losses from a single event | Modelling event-based accumulations, structuring multi-layer towers, negotiating reinstatements | Shields capital from major natural catastrophe events |
| Aggregate XoL | Protecting against high-frequency loss accumulation over a period | Defining aggregate retention and limit, monitoring loss accumulation against the attachment point | Caps total annual losses regardless of how many events contribute |
Key Takeaways
| Five things to retain from this article |
|---|
| 01 Treaty reinsurance suits high-volume portfolios where the reinsurer accepts risk in aggregate. Facultative suits individual complex risks outside treaty scope. Brokers working with cedants who have both need to understand which structure applies to which risk and why the wrong choice creates coverage gaps or unnecessary cost. |
| 02 In proportional reinsurance, the ceding commission and profit commission structures are as commercially important as the cession percentage itself. A lower cession with a higher ceding commission may benefit the cedant more than a higher cession with a lower commission, depending on the book’s expected loss ratio. |
| 03 Excess of loss attachment points must be calibrated against actual loss distributions, not arbitrary round numbers. A layer that sits below where losses realistically concentrate will be triggered frequently, creating friction with the reinsurer and potentially affecting renewal terms. |
| 04 Bordereau accuracy is not an administrative task. Errors in premium allocation affect commission calculations. Errors in loss coding affect reserve adequacy. Both affect the cedant’s relationship with their capacity provider and their ability to negotiate renewal terms from a position of credibility. |
| 05 In the London subscription market, the lead reinsurer sets the commercial terms for the entire programme. Brokers who can present a well-constructed submission and place the lead quickly get better terms. Following markets rarely improve on the lead’s position. |
Frequently asked questions
Treaty reinsurance provides automatic coverage for an entire portfolio under a standing agreement, where the reinsurer accepts risks based on the cedant’s underwriting guidelines without evaluating each individually. Facultative reinsurance is placed on a case-by-case basis for individual risks outside treaty scope. The broker’s role differs significantly: treaty placement is a periodic programme negotiation, while facultative requires individual underwriting submissions for each risk.
A quota share agreement involves the cedant sharing a fixed percentage of all premiums and losses with the reinsurer across every policy in the covered portfolio. In a 30% quota share, the reinsurer receives 30% of premiums and pays 30% of every loss, and in return pays a ceding commission to compensate the cedant for acquisition costs. The broker’s negotiation focuses on the cession percentage, the commission rate, and any profit commission structure.
Excess of loss is a non-proportional reinsurance structure where the reinsurer pays only when the cedant’s losses from an event exceed a predetermined attachment point. A layer expressed as £10,000,000 xs £5,000,000 means the reinsurer covers losses from £5,000,001 up to £15,000,000. Multiple layers can be stacked to form a tower. The broker’s primary task is modelling loss frequency and severity at each attachment point to structure the tower correctly.
A bordereau is a detailed reporting schedule providing reinsurers with granular data on individual policies or claims ceded under a treaty. Errors in submission, whether incorrect data, inconsistent formatting, or late delivery, cause delayed premium settlements and loss recoveries and can damage the cedant relationship with managing agents and capacity providers.
Ultimate Net Loss is the final amount of loss borne by the cedant after all recoveries, including salvage and subrogation, have been applied, plus loss adjustment expenses. It contrasts with ground-up loss, which is the total gross loss before any deductions. Contracts referencing UNL require the broker to understand exactly which items are deductible, as the definition directly affects how much the reinsurer pays.
The broker prepares a slip containing all material information about the risk and proposed terms. A lead reinsurer signs the slip and sets the terms. Following markets accept the risk on the lead’s terms, each taking a percentage line until the placement reaches 100% capacity. If total lines exceed 100%, each reinsurer’s share is signed down proportionally. The broker’s skill in selecting the lead and managing the subscription order directly affects the quality of terms secured.
Proportional reinsurance involves the cedant and reinsurer sharing premiums and losses in fixed percentages directly linked to the cession. Non-proportional reinsurance only responds when losses exceed a specified attachment point, without a direct premium-to-loss ratio. Proportional structures suit high-volume portfolios; non-proportional structures suit protection against severe individual events or catastrophe accumulations.
When a loss exhausts an XoL layer, reinstatement provisions determine whether coverage can be restored. Automatic reinstatements restore coverage immediately at a pro-rata premium. Paid reinstatements require the cedant to actively pay a reinstatement premium to restore the layer. The number of reinstatements available limits how many times the layer can respond in a single policy period, which is critical for catastrophe-exposed programmes.
Glossary
| Key terms used in this article |
|---|
| Ultimate Net Loss (UNL) The final amount of loss borne by the cedant after all recoveries, including salvage, subrogation, and other reinsurance, have been applied, plus loss adjustment expenses. The basis on which most excess of loss contracts define the cedant’s liability before the reinsurer’s obligation is triggered. |
| Hours Clause A provision defining the maximum consecutive period within which losses from a single peril must fall to be treated as one occurrence for XoL purposes. Typically 72 or 168 hours for windstorm. Critical for catastrophe XoL structures where multiple events may occur close together. |
| Signing Down The proportional reduction applied to each reinsurer’s committed line when total subscription exceeds 100% of the risk. If reinsurers collectively offer 120%, each line is multiplied by 100/120 to bring the total to exactly 100%. |
| Ceding Commission A payment from the reinsurer to the cedant compensating for the acquisition and administrative costs of writing the original policies ceded under a proportional treaty. Typically expressed as a percentage of ceded premium, either fixed or on a sliding scale linked to the loss ratio. |
| Attachment Point The monetary threshold at which reinsurance coverage begins in an excess of loss structure. The cedant absorbs all losses below this level. Setting the attachment point requires modelling where losses realistically concentrate in the cedant’s portfolio. |
| Slip The document prepared by the London Market broker summarising all material information about a risk and the proposed reinsurance terms. Functions as both a submission document and, once signed, the basis of the reinsurance contract. |
| Loss Carry-Forward A mechanism in profit commission calculations where losses in one period are carried into subsequent periods, reducing the commission base until prior losses are recovered. Means a single bad year can suppress profit commissions for several renewal cycles. |
Conclusion
Reinsurance vocabulary is not a separate language that brokers learn once and then apply mechanically. It is a working toolkit that determines how precisely a broker can describe a risk, how credibly they can negotiate terms, and how accurately they can account for what has been placed and what has been claimed.
The practical consequences of vocabulary gaps show up in specific places: an attachment point set without reference to the actual loss distribution, a bordereau submitted with claims coded to the wrong treaty year, a UNL calculation that excludes subrogation recoveries the cedant expected to keep. These are not theoretical errors. They arise in ordinary placements and create consequences that range from delayed settlements to disputes at renewal.
For reinsurance brokers managing delegated authority business, the vocabulary challenge compounds as the book grows. A broker placing five facultative risks a year can manage submission quality manually. A broker managing fifteen cedant relationships under delegated authority, each with quarterly bordereaux in different formats, cannot rely on the same approach. The operational infrastructure has to carry what individual attention used to.
The brokers who are best positioned in the current market, where capacity is ample but competition for the best terms is intensifying, are those who can present risk clearly, price the structure correctly, and account for what has been placed without friction. Language is the starting point. Infrastructure is what makes it scale.
See how Agiliux supports reinsurance broking operations
Talk to the Agiliux team about bordereau management, treaty administration, and the data workflows that sit between placement and settlement.
Sources cited in this article
- Society of Actuaries, Basics of Reinsurance Pricing, Study Note for Exam AT, 2014. soa.org
- Actuarial Society of South Africa, Profit Commissions in Reinsurance, Chris van der Merwe, 2025. actuarialsociety.org.za
- Lloyd’s of London, Delegated Data Manager, Lloyd’s Market Resources. lloyds.com